Reprinted with permission: euromoneyfxnews.com
T he response in the FX market to the more upbeat tone from the Federal Reserve points to the sea-change that has seen fundamentals take over as the driving force behind moves in the dollar.
Simply put, it appears there has been a paradigm shift in which the bull trend in the dollar is not merely a function of safe-haven flows.
Instead, the dollar reacted positively to the Fed’s positive tweak to its outlook on Tuesday, echoing a similar move early in the session after better -than-expected US retail sales figures and also the response to Friday’s encouraging employment report.
The dollar has, for now at least, transformed into a growth currency.
Dollar loses negative correlation with stocks
Source: Nomura, Bloomberg
This is a marked change to the regime that has ruled the market since the emergence of the financial crisis in 2007, in which the dollar has been inversely correlated with risky assets.
The dollar was only able to make gains during periods of heightened risk aversion and tension in dollar funding markets, as seen in late 2008, in the second quarter of 2010 and in the first half of 2011.
The “old” dollar regime
Source: Nomura, Bloomberg
Against the euro, it looks like the dollar has a good chance of breaking free of the old regime and start trading in a more healthy fashion – less negatively correlated to risky assets and more prone to rise on improving US economic data.
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